Taxation

Taxation of Interest Income

Interest income can be defined as the amount earned by the taxpayers on different financial products, accounts and investments either by way of lending to another entity, depositing the money in a bank or a financial institution, or even investing it in certain schemes. The investments such as savings accounts, fixed deposits, and recurring deposits bear interests making them a great option for risk-averse investors. Just like any other income, such income is also taxable as income from other sources. The present article discusses the taxation on the same.

Financial Products that Offer Interest Income

The financial products that offer this type of income are discussed below.

Savings Account

The bank credits the interest in the savings account in every quarter; the interest so accumulated in the savings bank account is considered taxable income under “Income from Other Source, which must be declared in the ITR. Saving account interest is taxable as per the slab rate of the taxpayer. However, it is worth noting that the bank doesn’t deduct TDS on savings bank interest. While incomes from the FDs and RDs are taxable, interest from the savings account and post office deposits are deductible to a certain extent.

Taxability of Interest Income on Savings Account

The taxability on this type of income on Saving Account is discussed below –

• The interest earned on a saving account is considered as ‘Income from Other Sources’.
• This income will be declared in the ITR and will be taxable in accordance with the applicable slab rate of the taxpayer. 
• According to Section 19A of the IT Act, 1961^[1], TDS won’t be deducted on saving account’s interest.
• For NRIs, TDS is 30% on interest on NRO accounts. No tax shall be applicable to interest on NRE accounts.
• Savings interest income of up to INR 10,000 in an FY is eligible for tax deduction under Section 80TTA of the IT Act.
• Interests pertaining to savings accounts up to INR 10,000 are technically treated as a deduction. 

Deduction under Section 80TTA

The aspects related to deduction under Section 80TTA are elaborated below

Section 80TTA of the IT Act was introduced for the purpose of allowing deduction of up to INR 10,000 on savings interest and encouraging taxpayers to generate more savings. This section applies to individuals and HUFs other than senior citizens. Section 80TTB applies in the case of a senior citizen.

In cases where the interest income from all the savings accounts is < INR 10,000, then the entire amount is deductible; however, if the interest amount exceeds INR 10,000, then the maximum of INR 10,000 will be deductible, and the remaining amount will be taxable.

Interest Income on Fixed Deposits

FDs have been a popular investment option for many investors due to them allowing the investors to exploit the complete potential of Section 80C with respect to the deduction of ₹1.5 lakh from their taxable income. However, interest received on FD is taxable. Income tax on interest on FDs is taxed under the head ‘Income from Other Sources. Hence, the income received from the same is added to the assessee’s total income. 

Taxability of Interest Income from Fixed Deposit

Interest received from FDs is fully taxable, and the tax liability is as per the taxpayer’s income tax slab. It is added to the taxpayer’s total income under ‘Income from Other Sources in the ITR of the taxpayer. The TDS is deducted by the bank when they credit the interest to the account, and not when the FD is matured, which shall result in the net amount of tax that must be added to the gross amount of the income and adjust TDS against the final tax liability.

Calculation of Income Tax on FDs Interest

There is often a mismatch between the interest income data available with the taxation department and the one shown in the Income Tax Return (ITR) filed by taxpayers. Therefore it is necessary to add it to the total income and accordingly calculate the tax liability so as to avoid any such notices. The below-mentioned steps must be followed by every taxpayer for calculating the tax liability on interest on fixed Deposits while filing the return of income

• Addition of such income under the head Income From Other Sources.
• Check the applicable tax slab rate
• Match the same with the yearly TDS deduction in Form 26AS.
• It must be noted that the Bank doesn’t deduct TDS for annual FD interest under INR 40,000
• The IT Department will adjust the TDS (which has already been deducted) against the final tax liability.
• Even when no TDS is deducted, the taxpayer must include such income in their total income and pay tax on the same
• If the taxpayer waits until the maturity of the FD when interest is actually received–the total interest income may push the taxpayer up to a slab and result in paying higher taxes.

Timeline for Payment of Income Tax on Fixed Deposit’s Interest

In case of the existence of any tax liability after the inclusion of this income in total income tax, the same  should be paid of the 31st day of March of that FY, i.e. prior to the ending of the financial year along with a quarterly advance tax payment, if tax liability exceeds INR 10,000

ITR Form for reporting Income from FD’s Interest

Assesses should file ITR 1 and report the income from fixed deposits interest under the income from other sources’ heads. This is in cases where in the taxpayer is only receiving income from FD interest.

TDS in relation to FDs

The relevant details regarding TDS on FDs are elaborated below.

Cases where the TDS is not deducted by the banks

The TDS is not deducted by banks in the following cases

• If total interest income received from all FDs with a bank doesn’t exceed  INR 40,000 in a year,
• The limit is INR 50,000 for senior citizens aged 60 years and above.
• Prior to Budget 2019, the limit of TDS on such income was INR 10,000.

Cases where banks deduct TDS @ 10%

• In case  such an income for the year from all the FDs with the bank exceeds INR 40,000 (INR 50,000 for senior citizens)
• The TDS Deduction will be 20% if the taxpayer doesn’t provide the PAN to the particular bank. Therefore it is important to submit the same to the bank
• However, if your income is below the limit of exemption, the taxpayer can file Form 15G/15H in order to avoid TDS. Form 15H is for senior citizens and 15G is for those other than senior citizens. The forms must be submitted at the beginning of each FY to avoid additional TDS

Senior Citizen’s Interest Income

Senior citizens who receive  such income from FDs, savings accounts, and RDs can avail of a deduction of up to ₹50,000 on an annual basis under Section 80TTB; however, if the same < ₹50,000 in a year, the bank cannot deduct any TDS.

Conclusion

The taxpayers can invest in the above-mentioned financial products to avail of the interest income. However, they need to be aware of its taxability  to avoid any legal complexities or penalties at the time of filing the ITR.

Read Our Article: Taxability of Dividend in Income Tax Returns